Falkland Oil And Gas Starts Drilling Huge Loligo Prospect And Announces Jv With Noble Energy

Junior oil explorer Falkland Oil and Gas (FOGL)

, which is focused on the South Falklands basin, has started drilling the eagerly-awaited Loligo exploration well approximately 200 km east of the Falkland Islands. FOGL is the operator of the well, and holds a 75 per cent interest, and is in partnership on this project with Edison International, which holds the remaining 25 per cent interest in the licence.

Loligo has transformational resource potential which FOGL is drilling to explore multiple reservoir targets. It is the first of FOGL's two-well exploration programme planned in the Falklands this year, and is expected to take around 60 days to drill.

FOGL has also announced a second farm-out deal, this time with Noble Energy. Noble will farm in to the Northern Area licences for a 35 per cent interest except for two excluded areas: the Loligo complex and Nimrod-Garrodia complex. FOGL will continue as operator of the entire Northern Area licences until early 2013, when operatorship of the farm-in area will be transferred to Noble.

Noble will also farm-in to the Southern Area licences for a 35% interest, with FOGL continuing as operator of these licences until no later than early 2014, when Noble will become the operator.

Noble's financial contribution comprises:

1) 60% of the Scotia well costs, including associated costs incurred during 2011.

2) $25 million in cash to be paid in January 2013 relating to back costs.

3) 60 per cent of the costs of the Southern Area licences commitment well.

4) 45 per cent of a discretionary exploration well, should Noble elect to participate in the well.

Noble's total investment over the next three years is estimated to range between $180 million and $230 million.

The deal leaves the following equity interests in FOGL's licences:

Northern Area licences:

FOGL: 40 per cent; Noble (operator): 35 per cent; Edison: 25 per cent.

In the excluded areas, the interests remain: FOGL (operator): 75 per cent; Edison: 25 per cent.

Southern Area licences:

FOGL (operator): 52.5 per cent; Noble: 35 per cent; Edison: 12.5 per cent.

FOGL is to propose to its partners the drilling of the Scotia prospect in the Northern Area licences in the fourth quarter of 2012, immediately following completion of the Loligo well.

This is an attractive deal for FOGL, reducing the risks of frontier oil exploration and adding Noble's experience of drilling in the deepwater Gulf of Mexico, offshore Eastern Mediterranean and offshore West Africa.

The farm-out also substantially improves FOGL's financial position. Assuming the Loligo and Scotia exploration wells are drilled within budget, the company estimates that it will have at least $200 million of cash on completion of the wells, which will fund additional exploration work.

Given suitable encouragement from the 2012 drilling results, this is likely to include two 3-dimensional seismic surveys over the Northern and Southern Area licences commencing in early 2013. Further exploratory drilling is then anticipated to commence in late 2014 and may include a programme of up to four exploration wells.

FOGL's chief executive Tim Bushell commented:

"Noble brings strong technical expertise and an excellent track record of exploration and development success. We have now brought in two highly respected international exploration and production companies and with this strong partnership in place, we have the financial and technical resources to help realise the potential from our large acreage position in the Falkland Islands."

Charles D. Davidson, Noble Energy's chairman and chief executive commented:

"We believe this region is very consistent with our new ventures exploration strategy of entering regions that provide prospects that are not only material in size, but also where initial success can de-risk subsequent opportunities. In this particular case we have already identified numerous oil leads on two-dimensional [seismic] data with an unrisked gross resource potential exceeding 6 billion barrels of oil."

Broker Oriel commented: "Overall this looks like a great deal for FOGL and should leave the company with over $200 million after the completion of a two-well programme in 2012 (equivalent to 31p/share) and brings a US-listed company into the Falklands area, which may help allay some of the concerns over Argentina. We retain our Buy recommendation and note that FOGL has the highest impact exploration programme in the UK-listed exploration and production sector.

by: Martin Li

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